Fed FOMC Minutes Transition to Data Dependence

Fed FOMC Minutes Transition to Data Dependence                 

• November FOMC minutes overnight make an explicit transition to data dependence by shifting away from guidance that “further gradual increases” are needed. This follows recent dovish speeches from Fed Chair Powell, Vice Chair Clarida and others. The Minutes include changes to communication to emphasize the importance of incoming data while hesitant hikers are also present with the statement that “a few participants have collectively raised concerns on further increases.” The FOMC minutes confirm the Citi analyst view that Fed officials are very likely to hike in December, but will likely be more tentative in 2019, probably hiking just twice (penciled for March and June).

• Meanwhile, news on trade sees some optimism overnight with the WSJ reporting that US and China are looking at a new trade “architecture,” where China would first make concessions in areas of farm and energy in exchange for the US suspending tariffs. This is said to be a starting point for further negotiations after which both sides would then enter a “ceasefire period”. Bloomberg adds “the two sides have also been eyeing a possible mid-December trip to Washington by Liu He, Xi’s top economic adviser, according to two people familiar with the discussions.” No specific date is given but keep in mind that China has several big events coming up that could provide an opportunity to talk.

• However, trade optimism is tempered by comments from US Trade Representative Lighthizer overnight saying, “as the President has repeatedly noted, China’s aggressive, State-directed industrial policies are causing severe harm to US workers and manufacturers. As of yet, China has not come to the table with proposals for meaningful reform. At the President’s direction, I will examine all available tools to equalize the tariffs applied to automobiles.” That said, US auto imports from China are relatively small compared to auto imports from other economies but the overall tone of the comments requires a need to temper any optimism ahead of Saturday’s Trump – Xi dinner.

EUR & GBP: Euro area inflation shows little sign of lifting (so far); a likely turbulent path to a UK parliamentary vote on Brexit on December 11

• European Commission's economic confidence survey overnight, beats expectations by declining less than expected to 109.5 in November vs 109.1 consensus. However, consumer confidence remains negative overall and in any case, the better than consensus data is offset by easing German inflation in November with EU-harmonized HICP inflation declining from an 80-month high of 2.4% in October to 2.2% YY. Implications for euro area HICP (data released tonight) - with Spanish and German HICP surprising to the downside, Citi analysts see downside risks to their forecast for a 2% YY euro area headline HICP while core HICP may also ease back to 1.0% YY from 1.1% in October.

• GBPUSD struggles to get past 1.2800 as PM May warns that should the UK Parliament vote down her Brexit proposal, “some people would need to take some practical steps in relation to planning for no deal.” However, PM May seems to have won the backing of cabinet member Andrea Leadsom, a vocal hardline Brexiteer and it is increasingly looking as if hardliners may decide that if PM May’s vote doesn’t get through on the first attempt, they would push for a Norway-style solution.

• There is also now a running order for the UK parliamentary “meaningful vote” on the government’s Withdrawal Bill – there will be five days of political wrangling until a vote is finally cast on PM May’s deal. The time line – (1) December 4 - Start of debates on the "Meaningful Vote" in the Commons. There will be five days of eight hour debates, each led by a different cabinet minister, who will defend his/her brief. (2) December 8-9 - Break for the weekend. (3) December 10 - Last day (of the five debate days). (4) December 11 - Vote.

Commodity bloc: Oil rebounds ahead of December 6th OPEC meeting; NZ business confidence flat but RBNZ still poised to hike in Q3’2019

• Welcome news for CAD as WTI bounces from testing $50 on the latest OPEC headlines from Reuters saying "Russia is becoming increasingly convinced it needs to reduce oil output in tandem with OPEC but is still bargaining with the producer group's leader, Saudi Arabia, over the timing and volume of any reduction”. Saudi Arabia has suggested a 1mn bpd cut from January 2019, and Reuters point out "if Russia bears the same proportion of cuts as it did under the existing agreement, its share of the reduction would amount to 166,000 bpd." Citi analysts points to all options being on the table for the December 6 OPEC meeting - from no production cuts to as much as a joint 1.4mn cut.

• In New Zealand, the ANZ business confidence index comes in flat versus prior - at -37.1 though with employment robust and tentative signs of wages growth in NZ, Citi analysts continue to look for the first RBNZ rate hike in Q3’2019 (versus market pricing and RBNZ projections for Q2’2020).

This is an extract from the Daily Currency Update, dated 30th November 2018. Please approach a Citigold Relationship Manager if you would like more information